SPIEGEL ONLINE

12/28/2012 05:57 PM

Fear of Global Recession

Germany Urges US to Resolve Budget Dispute

All eyes are on Washington where US President Barack Obama and lawmakers are due to launch last-ditch talks Friday to avert automatic tax hikes and spending cuts that could plunge the country into recession. German Foreign Minister Guido Westerwelle reminded all sides that they have a responsibility not just to the US, but to the global economy.

Time is running out. Leading Democrats and Republicans only have a few more days left to reach a deal in their bitter dispute over spending cuts, tax hikes and the budget. If they don't, the US economy could tumble into a recession and drag the global economy down with it. At 3 p.m. EST (8 p.m. GMT) on Friday, President Barack Obama will meet congressional leaders from both parties at the White House for a last-ditch round of talks.

World attention is focused on the negotiations, for which Obama broke off his Christmas vacation in Hawaii. A deal must be reached by Sunday at the latest otherwise the US economy will go off a "fiscal cliff," shorthand for the automatic spending cuts and tax hikes worth $600 billion that will begin to take effect on Jan. 1.

The German government too is closely watching the budget battle. It could have a crippling effect on a euro-zone economy that is already struggling to keep its head above water.

"I am sure all the decisionmakers in the US are aware of their responsibility for their country and the global economy," German Foreign Minister Guido Westerwelle told SPIEGEL ONLINE hopefully on Friday.

He then added what sounded like a dig at a US that has for months been urging Europe to spend its way out of crisis. "We welcome that there is unity in Washington about the need for budget consolidation."

Still, Congressional leaders in Washington have shown no unity whatsoever when it comes to measures that might actually achieve such consolidation. And it is a division that is beginning to worry the world. The director of the International Monetary Fund's Monetary and Capital Markets Department, José Viñals, warned a few days ago that a fall off the fiscal cliff would have "dramatic consequences" for the US, the global economy and financial markets which would be likely to become far more nervous.

Accounting Tricks to Buy Time

US Treasury Secretary Timothy Geithner informed Congress on Wednesday that without any action, the government is set to reach its $16.4 trillion debt ceiling on December 31. He said the Treasury would begin a series of "extraordinary measures" to buy time. "These extraordinary measures ... can create approximately $200 billion in headroom under the debt limit," Geithner wrote in a letter to congressional leaders.

The accounting tricks could buy the government about two months to resolve the dispute.

If no deal of any sort is reached, the consequences would be disastrous, with the spending cuts slowing the economy. The Congressional Budget Office calculates that economic growth in 2013 would be reduced by up to four percentage points, which would probably plunge the economy back into recession.

The rate of unemployment would rise from 7.9 percent at present to 9.1 percent, according to US forecasts, which translates into two million more jobless people.

Many economic analysts fear there could be a long-term recession resulting from the various measures that are set to take effect in the coming months in the form of income tax hikes, cuts in unemployment benefit and increased taxes on income from capital and real restate.